Low GDP estimates on expected lines, but manufacturing remains a cause of concern: 28th February 2023

 The GDP numbers released today for the third quarter (Q3) of the year and the revised estimates for FY23 (financial year 2023) have by and large been on expected lines. For the year, the NSO has stuck to 7 per cent, which means there is no change from the preliminary estimate made earlier. For the third quarter, growth is at 4.4 per cent, as projected by the RBI. (The Bank of Baroda estimate was 4.6 per cent).

Growth in Q3 has been driven mainly by the services sector. First, the component including trade, hotels, transport etc. has grown by 9.7 per cent on top of 9.2 per cent last year. This is due to pent-up demand in the segment once the sector was fully opened up from April 2022 onwards, which is also reflected in the PMI numbers. The third quarter coincides with the post-harvest and festival season, which supported this growth. Higher GST collections also supported this growth.

Second, the financial and real estate component grew by 5.8 per cent, which could have been higher in case households had saved more in bank deposits. Yet, growth here has been higher than last year. These two trends have countered the slowdown in growth in the public administration, defence and other services segment which grew by just 2 per cent as the government was cautious in its revenue expenditure. In fact, the growth in GVA was 4.6 per cent while that in GDP was lower at 4.4 per cent as the net taxes (taxes minus subsidies) were negative since the subsidy bill rose due to higher allocations for food and fertilisers.

A setback was expected is the manufacturing sector. But -1.1 per cent is lower than expectations. This can be attributed to depressed profit and loss accounts of companies, as profits had come down due to higher input costs which came in the way of value addition in this sector. This year, the growth is likely to be just 0.6 per cent. This has been the Achilles heel of our growth story. Jobs will be created only if this sector grows at a robust pace on a sustained basis. Sluggish growth in consumption has come in the way as seen by negative to low growth in the consumer goods segment all through the year.

Construction has been a saviour in this scenario with growth of 8.4 per cent due to the smart demand for housing that has been backed by bank credit too. Also, the government push on infra, especially roads, has helped to hasten the pace of growth. Agriculture has added to the growth though there are concerns about the rabi crop given the heat wave. For the year, the NSO is looking at 3.3 per cent growth, which can slip if the wheat crop is affected, as it happened last year.

During this quarter, there has been a decline in the share of consumption in GDP from 65.1 per cent to 63.3 per cent. Higher inflation too has come in the way of growth in consumption as incomes have not been increasing in a commensurate manner. Also, the gross fixed capital formation rate has increased only marginally from 26.6 per cent to 26.8 per cent. While the government has been doing its bit on investment by spending where required, the private sector has been slow to match the same for the last 3-4 years. This is reflected in the data on capital formation. Ideally, it should have increased at a faster rate. This is also seen in the pattern of growth in bank credit, where retail — rather than the corporate segment — has been the driver.

The RBI can take heart at these numbers as they are on expected lines. It can continue to look more closely at inflation, which the MPC is expected to target. The present heat wave is disturbing from the inflation perspective. It has the potential to keep the CPI inflation in the region above 6 per cent for a longer period of time if the wheat crop registers a decline in production. The RBI, however, need not revisit the GDP growth forecasts it had for FY24 — which was at 6.4 per cent — as the figures for FY23 have not really changed. The government and the Union budget too would take heart from this number for FY23 as no further alterations have to be made on the assumptions made when working on the fiscal arithmetic for FY24.

How global is India’s economy? Businesslike 1st March 2023

 There is now a consensus on India emerging as the second fastest growing economy for the second successive year in FY24, despite the slowdown in the West.

Does this mean that India’s growth path is largely decoupled from the rest of the world?

When the ‘Make in India’ campaign was launched, its objective was to foster export promotion. Import substitution, too, was an implicit goal. Now the PLI scheme gives outright subsidies to around 14 sectors for making a certain quantum of investment that is linked with incremental output that would finally be rewarded with a 4-6 per cent payback. This has also been a means for both import substitution and exports promotion.

The question that arises is that if we have made progress on exports, then there should be some adverse impact on growth when a part of the developed world slips into a recession. Besides, in a globalised world, there could be spillover effects in other areas, especially in foreign investment flows through both the direct and portfolio routes, which would slow down.

Further, a recession in the West would also mean that demand for Indian labour as well as computer related services would come down. These could affect our balance of payments. At the other end, ECBs and NRI deposits too will get impacted depending on the policy of interest rates, especially in the West. Rising rates in the US would make ECBs dearer and NRI deposits more attractive in local territory, which will have a negative impact on domestic funding flows.

The table juxtaposes all these elements with GDP at current prices. The purpose is to see how these components have moved along with GDP in the last decade. As a component of GDP, exports boost growth, the other flows are assumed to increase as a proportion of the GDP. Normally, absolute figures of software receipts and remittances, when viewed in isolation of the GDP, do not give a true idea of how they are faring over time.

Data for the last 10 years have been considered here and the average for the last two quinquennium has been considered. The second quinquennium excludes 2020-21 and hence includes FY17-20 and FY22. The first period covers FY12-FY16.

Several interesting points emerge from this table. First, the ratio of exports to GDP has come down over time. This is both good and bad news. The good part of this story is that it shows growth is primarily driven by domestic factors and hence decline in exports does not affect GDP growth significantly. This is probably one reason why growth projections are high for next year, at 6-6.5 per cent. The not-so-good part of this story is that even though a lot of push has been given to exports with specific emphasis on sectors that have a comparative advantage, they have not quite managed to carve a niche.

Even where opportunities have arisen, such as the US putting restrictions on Chinese imports or the more recent the Ukraine war, we have not quite made any significant inroads. Hence this means that while a steady growth in exports will supplement domestic growth, we are far from being an export-led economy.

Second, while software receipts growth in rupee terms has been 56 per cent in the last five years, the GDP it has lagged and hence in relative terms has not kept pace. Quite clearly this will be an area of concern in FY24 if the recession hits the demand for these services.

Third, the fall in the ratio for remittances is also considerable, as it has declined from 3.5 per cent to 2.8 per cent. Here too growth has been just 35 per cent in rupee terms for the average remittances in the two quinquennium. The pace of growth has not been in line with the GDP growth even though it has been rising. Here too there can be an impact at the margin due to the global slowdown.

Fourth, the FDI flows have been very positive with growth of 89 per cent in rupee terms in the last five years. This is an area where there is uncertainty. The flow of FDI depends on both push and pull factors. The pull factor is strong with the economy doing well and the policy framework in place. In fact, the China factor will shift more investments towards India. However, the push factor will depend on both the quantum of investible funds available. Therefore the net impact needs to be monitored closely.

Fifth, the ratio of FPI to GDP has come down sharply due to the negative flows witnessed in three of the five years. In a way this should provide comfort; even if these flows are minimal, they will not affect our markets as the indices have ballooned notwithstanding these negative flows. Domestic institutions have provided an insulation to a large extent.

Interestingly, the net NRI deposits have been negative on an average basis in both the periods. This means that there is no reason to be dependent on them for support from the point of view of balance of payments. ECBs too have seen a decline from 1.4 per cent to 1 per cent and would not be attractive at a time when the interest rates are rising all over.

What this data shows is that India still remains a largely domestic economy which provides strength to growth. But a recession does have implications for the external sector where inflows can get dented at the margin. Cumulatively they have the potential to pressurise the rupee which will remain a variable to be monitored closely by the RBI.

CEO salaries as a multiple of median pay vary widely : MInt 1st March 2023

 

CEO compensation has always been impressive in the private corporate sector. In the last two decades or so, there has been a substantial change in how these packages are looked at, with the inclusion of stock options. It is normally believed that once a company’s top management or employees are awarded stocks, they have an incentive to work harder to enhance shareholder value because as profits increase, so does the firm’s market valuation, which in turn benefits everyone. This largely holds in the private sector, though the public sector too runs employee stock option schemes at times. But what about non-stock based compensation?

One may recollect that in the past, a prime minister had spoken about high executive compensation and the need for moderation. That was a subjective view, as, in a capitalist system, the market decides compensation. And normally, as the top management witnesses an increase in pay packages, those down the line also benefit, though not to the same extent. It is the old theory of trickle- down effects.

At the end of the day, any top-level pay package must be ratified by shareholders in an annual general meeting, which is often the clinching argument. If shareholders are okay with a big package, nothing is amiss because it is a reward for performance. The CEO takes maximum responsibility and is answerable to the board, which guards the interest of shareholders. Therefore, any debate on this issue is only academic. The Reserve Bank of India (RBI) has a structure for permissible executive pay at banks, where certain personnel also run the risk of a claw-back in case things go terribly wrong. But in sectors with no such rule, the market decides on the CEO’s pay package.

Average employee compensation varies across industries. Typically, companies which are more knowledge-based tend to have higher rewards, compared to those where skill levels are lower. These days, it is mandatory for companies to reveal the ratio of CEO compensation to the median pay of their staff. This is an interesting metric because it shows how much the CEO is valued. There is, however, no norm for this ratio. There was a time when one could talk of the ratio of the highest and lowest paid worker. But this won’t make sense in manufacturing concerns or even services, where there could be a large number of unskilled workers. Hence, while the median is not the best metric, it is still acceptable when talking of how these heads are valued by their companies.

There is data for 2021-22 on the remuneration multiples of the top person (executive chairman, CEO or MD) to the firm’s median salary for BSE-30 companies. Public sector companies do not need to publish this information, which would anyway be embarrassingly modest. This leaves 27 companies, of which three did not report the same. As far as possible, stock options which have vested have been excluded. We see that the BSE-30 multiples vary from as low as 31 (Maruti Suzuki) to a high of 670 (Larsen & Toubro), which is quite a wide range. TCS’s ratio is 396. Importantly, no specific pay proclivity can be seen in any sector and there are spikes in both the manufacturing and financial sectors, depending on the company.

The multiple shows how a company values its top business leader. These multiples can however be skewed, depending on the median salary of the staff. Not all 30 companies have provided this information, but some have. In the case of Tech Mahindra, for example, the median annual salary in 2021-22 was ₹5.27 lakh. Hence its multiple of 87 would not translate to a very large compensation in relative terms. In L&T’s case, the multiple of 670 goes along with a median salary which is higher at ₹9.14 lakh for the year. A company’s median salary tends to vary by the extent to which it has unskilled labour employed, for which the remuneration would be much lower.

The ratio in the financial sector is interesting. These firms too have the characteristic of having a large workforce in sales, which would be on lower pay scales. Here, the variation is quite significant. Kotak and Axis are at the lower end, with multiples of less than 100, while HDFC and IndusInd are much higher, with ICICI Bank somewhere in between. The ratio for Bajaj Finance, a non-bank financial company, is 246, which can be compared with HDFC Ltd’s 156.

Clearly, the person on top is valued many times more than the average employee across the board. This can be linked with the job’s disproportionate responsibility. Often, there could be another 5-6 personnel earning slightly lower than the CEO but significantly higher than the median. Most of these remuneration packages come along with stock options, as also guaranteed pay increases. There would also be a big variable component that is linked to the financial performance of the company.

A provocative thought comes to mind here. In the present context, several companies both globally and within (especially in the IT and fintech spaces), are going in for mass layoffs. There are never instances of CEOs being removed to save on costs, considering that their pay packages can be 300-400 times the median, which means it would be the payroll-cost equivalent to that number of employees asked to leave. While the CEO takes most credit for success, the chief faces no downside when the chips are down. Heads I win, tails you lose? This should foment some debate.

 

It is impossible to escape globalisation: Free Press Journal 18th February 2023

 

Can we ever be free from global waves? Even today at the macro level the smell of a recession in the West has already caused considerable turbulence in economic forecasts, and this is where India stands out by being decoupled. But at the micro level, globalisation still stands strong as is seen in India recently

The trend these days is for countries to become more inward looking. Besides politics which appeals to the electorate, Covid has justified such jingoism. But can we ever be free from global waves? Even today at the macro level the smell of a recession in the West has already caused considerable turbulence in economic forecasts, and this is where India stands out by being decoupled. But at the micro level, globalisation still stands strong as is seen in India recently.

The controversy relating to a large Indian conglomerate bears testimony to this theory. The case is simple. A short seller in the USA had a report on the conglomerate where certain failings were alleged and this came out at a time when the Indian group was going in for an FPO. A micro issue should ideally not have become a macro one. But it did, at least temporarily.

The impact on the landscape has however been far-reaching, as several questions have been raised as a consequence of this episode. The RBI has acted with alacrity and done a quick reality check with banks. The press release put out that the banking system remains as strong as ever is timely and keeps out speculation. The exposures of the system to the group are low and well within the limits prescribed by the regulator even in case the worst-case scenario plays out. This is assuring.

SEBI would also be looking into the allegations made as they are in the realm of market practices. The issue is complex as the Mauritius route has always been known for opacity and would require time to get things clarified.

Let us see now as to how the process of globalisation has led to seepage through the domestic system, raising several doubts. First, to begin with the news of the report had an impact on the prospects of the IPO which remained unsubscribed by the retail investors and it was a last minute entry of certain players that saved the issuance. This was probably expected.

Second, along with this news, the share prices of the group companies went down, which has been magnified as being the loss to shareholders. This should be read with caution because there is a difference between notional and actual loss. The notional loss, as the word indicates, is only theoretical. The actual loss is only when a sale is reckoned. Typically investors don’t sell when there is bad news; but the erosion in market cap was sensational. The market is now back to normal after a fortnight treating this episode more as ‘noise’ which can be ignored now.

Third, as long as the controversy lasts, foreign investors will think twice about these stocks, which is not good news. This is the collateral effect. Add to this the fact that some of the global indices have lowered the weight of these stocks, means that there is a second round of loss of interest in this Group’s shares. This is more a micro issue but is unsettling as we talk of Indian bonds being included in global bond indices.

Fourth, it is still not very clear whether foreign investors will lower exposures to India and choose other markets as ours is still enticing. A clarification on the governance issue will help here. FPIs have been negative in equities so far this month though it is hard to conjecture if the two can be linked. This is why a voice from the regulator would help to assuage sentiment here.

Fifth, while the RBI has put out the green flag, lending institutions will review their options on further lending. Overall leverage of this group and other such conglomerates will be looked at more closely by the banking system. This will be more of a hygiene issue at the micro level as there is more scrutiny on other group lending too. Also, this incident will strengthen the case for not giving banking licenses to corporate houses.

Sixth, as most of these exposures of the system to the Group are in the infrastructure space, a question raised is whether there will be any pushback here in terms of private investment. This particular group has been a frontrunner in ports, airports, power, and storage among others and has in a way been instrumental for substantial building of infra in the country. For the last few years the government has been doing the heavy lifting on infrastructure hoping to crowd in private investment. The broader issue here is whether these contracts will be reviewed by the concerned parties. As of now it looks like that there aren’t concerns, but one can never tell.

Seventh, it is likely that there would be a deep dive investigation of several companies, especially those which have investors coming in from tax havens. This is a fallout of this episode for sure as there has been considerable opacity on this score.

Globalisation is hence still strong today with a single external report causing considerable disruption in the Indian markets (even if the political noise is ignored). There will definitely be learnings from this episode. A lot of cleaning up, which means revisiting both the banking as well as securities market, is likely to follow to ensure that there is more transparency in the system. But on the whole after the initial hiccups, business will continue as usual given the strength of the economy and the policy framework that is in place.

Age is just a number: Financial Express: 19th February 2023

 

Age is just a number

Life can be lived to the fullest at any stage

The incidents penciled by the author are very personal and involve her family members and will resonate with her friends, but would be of no interest to the lay reader.

Insatiable: My hunger for life
Shobhaa De
Harper Collins
283 pages, Rs 699

The author goes to a book store and sees a man fretting over not finding a book on the shelf. When asked, the reply is that he is searching for the book he has written. He adds that he is not Shobhaa De whose books are always on the front display. This is very pertinent when it comes to the book Insatiable by De. It is a collection of thoughts post-covid and quite different from her earlier publications and not really meant to excite. Written like a diary, it is quite unpretentious, but interestingly finds a publisher, which others would find difficult, as it is penned by a celebrity.

The incidents penciled by the author are very personal and involve her family members and will resonate with her friends, but would be of no interest to the lay reader. She retains her wit and forthrightness while writing, which is vintage De. She continues to be droll as she writes about her Maharashtrian background and describes the values which some people of the community will give an affirmative nod to. She also takes her shot at the Shiv Sena when she has to choose a menu for visitors and does not want to get into trouble, like she did with the vada-pav controversy. And she adds tongue in cheek that our PM would agree with Bagehot, who said that to be an effective symbol one needs to be seen all the time.

One can get a peep into how high society lives in this narrative- the parties, travel, glamour and glitz. Life begins in what we call SoBo (south Bombay or Mumbai) and ends at the Worli-Bandra sea link for such celebrities.

There is nonetheless a certain zest in her life which is revealed through the book, with the takeaway that age does not come in the way of living life to the fullest, both in terms of appearance and attitude, which should be an inspiration for even grandmothers. That is ‘hunger for life’. She shows that at any age one can have the best of champagne and wine and still keep fasts and be religious and believe in horoscopes. She does exhibit signs of melancholy at the thought of aging and her knees going weak, but that’s fleeting.

There are some throwbacks to the past and people like MF Hussain, Aamir Khan and Salman Rushdie, with a bit of old gossip being shared by the author, like sharing a table with Rushdie with Padma Lakshmi. But it’s too little and far between, which can be a disappointment for readers.

Insatiable can be likened to probably the Karan Johar show on TV where one enters a world that is unreal to most of the audience. It is engaging to begin with, but gets mundane subsequently. But then diaries are personal and are not meant to excite.

Lower inflation only means the pace of grief is slowing : Economic Times: 18th February 2023

https://economictimes.indiatimes.com/opinion/et-commentary/lower-inflation-only-means-the-pace-of-grief-is-slowing/articleshow/98025566.cms

 

Balancing Numbers: Business World 13th Feb 2023

 The Union Budget for FY24 was a special one coming as it did before the General Elections in 2024. The budget has been drafted keeping in mind the primary goal of attainment of the fiscal deficit ratio of 4.5 per cent by FY26. To this end, the starting point has been reduction in fiscal deficit ratio by 0.5 per cent to 5.9 per cent for the forthcoming year. This will mean a deficit of Rs 17.86 lakh crore, which is almost the same as that of last year (Rs 17.55 lakh crore). The net borrowing of the government at Rs 11.8 lakh crore will ensure that there is no undue pressure on liquidity in the system. This is important today as there is a tendency for liquidity in the system being compressed presently and the markets were closely watching this number with interest. The fact that the bond yields came down post budget announcement vindicates the fact that the fiscal arithmetic has gone down well with the market.

How has this been achieved? On the revenue side the budget assumes GDP growth of 10.5 per cent which also gets reflected in growth of both direct and indirect taxes. Therefore, in a way, the budget has been conservative with revenue projections. This makes sense in these uncertain times. There can hence be a positive surprise if things work out better. While doing this, relief has been provided to the income tax payers with the new scheme being made more attractive. There has not been any change in the corporate tax structure though for new companies some incentives have been provided. Therefore, the numbers look realistic.

On the indirect taxes front, the customs duties have been changed – either increased or decreased depending on the products. The interpretation: giving a push to the user industries (where duty is reduced) and offering some kind of protection (when raised). This need not be looked as a revenue garnering measure. The GST rates are anyway outside the purview of the budget. The government has not changed the excise duties on fuel which is significant as it means we continue paying the same price on petrol and diesel.

On the non-tax revenue side, the interesting thing is that lower returns through dividend are expected from the banking sector and this is because the RBI will not be transferring large surpluses. There are expectations that the non-bank PSUs would also provide a healthy flow of dividend. This needs to be seen in the backdrop of corporate profitability remaining under pressure in FY23. With the economy slowing down from 7 per cent to say 6.5 per cent in FY24 (as per the Economic Survey) there would be moderation in profits growth too.

The budget has been sanguine on the disinvestment front once again with a target of Rs 61,000 crore being placed which includes Rs 10,000 crore of asset monetisation proceeds. Here it needs to be seen if this amount can be garnered as it has been observed that progressively as the low hanging fruits are plucked the ability to push through disinvestment becomes tougher. The budget however once again places high hopes here.

Rationalising Numbers

The budget has worked dexterously on the expenditure side. As a growth stimulus the capex part of the budget has been enhanced to Rs 10 lakh crore (Rs 8.7 lakh crore if transfers to states are excluded). How has this been made possible? The answer: budget has reviewed all outlays and seeks to rationalise some of them. The subsidy bill, for example, has been lowered. The food subsidy bill has been lowered from Rs 2.25 lakh crore to Rs 1.75 lakh crore which releases around Rs 50,000 crore. For fertiliser subsidy the reduction is around Rs 90,000 crore. Therefore, this combined savings of Rs 1.40 lakh crore helps to finance the incremental Capex.

The logic for these reductions is straightforward. Global commodity prices have eased of late. The higher fertiliser subsidy was necessitated by higher price of imports. In fact, in FY23, the government raised the outlay from a budgeted amount of Rs 1.05 lakh crore to Rs 2.25 lakh crore. With prices coming down, it is possible to rationalise this amount to Rs 1.75 lakh crore. In case of food subsidy, the bill rose from Rs 2.07 lakh crore to Rs 2.87 lakh crore last year due to the extension of the free food scheme. Now by rationalising the same and merging the free food scheme with the Public Distribution System (PDS), the outlay has been lowered. These two increases last year were of contingent nature which will hopefully not be repeated in FY24. Along with these two cuts, the NREGA outlay has been lowered based on similar rationale from Rs 89,400 crore to Rs 60,000 crore in FY24. Hence there have been savings invoked in another critical area.

Hence it can be seen that considerable effort has gone in drawing up a feasible budget while keeping a keen eye on the fiscal deficit ratio. A further roll back in subsidy elements (granted due to the pandemic, Ukraine war) is also possible as we move ahead. Keeping the
 PM-Kisan allocation unchanged means the budget has steered clear of any kind of populism.

The ideology behind budgeting has changed over the BJP years , 14th February Mint

 The Budget is certainly India’s most talked about economic policy announcement, both before and after presentation. There are a plethora views on where the government should spend with compelling arguments. The speeches are worded very well to create the perception that no one is left out. Specific outlays for either the previous or coming year are highlighted to send the right signals. But is there a pattern that we are missing?

One theory says that a government should run a welfare state and use such spending to bring about redistributive justice. Another view is that the government should spend on infrastructure, where private interest is limited. As a corollary, everyone talks of government capex crowding in private investment. What is the true picture; and are there any shifts in how budgets are drawn up?

I analyse the period post 2010-11, with 2020-21 kept out as it was an unusual year. As budgets tend to focus on varied issues at different points of time, averages for the first 2 quinquennium ending 2019-20 and the same for the 3 years starting 2021-22 are considered. The idea is to get a hang of whether there is any change in approach to budgeting. These periods also coincide with different political regimes and hence could reveal inflections of political ideology.

There are around 57 ministries/departments for which budgeted expenditures are drawn up. These have been classified under 5 groups. The first, called ‘masses’, covers 10 ministries and includes the ministries of agriculture, rural development, consumer affairs, chemicals, petroleum, etc. All outlays for these ministries are linked finally to some support provided to a vulnerable class. Petroleum is classified under this as its subsidy was aimed at consumers.

The second is ‘essentials’, which includes defence, finance and home affairs. These relate to the security of the realm, which includes a commitment to service debt and other compulsions of the finance ministry. The third is infrastructure, comprising 8 ministries which cover all the broad areas under this heading. The fourth is industry, which spans 7 ministries, while the ‘others’ category has 29 ministries dealing with research, knowledge, social development and so on.

This five-fold classification not only reflects the change that has gradually been engineered by budgets, but also points to the way things will move in the coming years. This can aid expectations and help eschew naïve statements made before a budget on whether it will be populist or capitalist, because, while perceptions may be created, allocations at the end of the day are in line with the government’s ideology.

The table is interesting. First, allocations under ‘masses’ have come down sharply on a point-to-point basis. While it has risen in the latest period, this is mainly on account of help still being extended to weaker sections (farmers in particular). Compared with the second period, agriculture, fertilizers and consumer affairs have gotten higher allocations, but there have been savings made in petroleum and health. One may expect this number to come down further going ahead, as the environment stabilizes.

Second, expenditure under ‘essentials’ has shown a decline. The allocation for finance is more or less stable where the commitments are fixed, like interest payments. But with bank capitalization no longer on the agenda, there have been savings invoked. The interesting part is that the share of defence in the total has come down from 17.2% in phase 2 to 13.5% in phase 3. In phase 1, it was 16.5%. The same was witnessed in the allocation for home affairs.

Third, the infra story probably stands out the most. Its share has more than doubled in phase 3 compared with phase 1, with a consistent increase of over 50% in both these phases. This is where an ideology is revealed quite clearly, given the emphasis on creating assets and fostering economic growth. It can be said unequivocally that Indian budgets are becoming more growth-oriented.

Fourth, allocations made to ministries related to industry show that the private sector should not count on getting too many payback sops (such as the production linked incentive) and that its concerns would be addressed outside the budget via policies and not payouts.

Last, the miscellaneous category has witnessed declines, albeit only gradually, meaning thereby that as our budgets focus more on growth, things like research, section-specific schemes, etc, are likely to see cuts. The interesting thing here is that the water department has witnessed increased allocations, while the HRD ministry has witnessed sharp cuts from 4.5% in Phase 1 to 3.6% in Phase 2 and 2.1% in Phase 3.

The message that emerges from these trends is that the days of handouts can be expected to diminish to a large extent. Further, the government will be pushing hard for growth, as the crowding in of private investment has not worked so far. That is understandable, considering that the private sector does not invest unless there is profit to be made, while the government has the luxury of overlooking financial outcomes. Finally, there will be constant switching of allocations across the other ministries that will be need based. Therefore, we need not fret or get elated either which way.

In media

 on credit policy day on WION

https://www.youtube.com/watch?v=vw8ufjue2bQ

Saving the investor: Indian Express 13th February 2023

 

Price worries. Dissecting the credit policy: Business line 8th February 2023

 The monetary policy was not expected to surprise the markets as a 25 basis point (bps) cut was taken for granted.

However, these days more important than the rate change is the number of votes within the Committee for the decision as well as the commentary that follows. The first tells us that a divided view can go the other way in the forthcoming policies, while the commentary reflects the rationale for the decision.

A divided view is important as it means that there is a strong alternative view especially on inflation trajectory and the efficacy of past rate hikes. The point however is that once the MPC takes a pause, it becomes difficult to raise the rate again if inflation remains high which will be the case going by the trajectory forecast by the RBI for FY24.

Let us try and analyse the commentary. The RBI has increased the repo rate while maintaining the stance of ‘withdrawal of accommodation’.

While the rate hike was expected, the stance was also expected to change to neutral which could have been a precursor to the lowering of the repo rate going ahead. The rate hike was inevitable as inflation though declining is still high and the RBI’s forecast for the fourth quarter is 5.7 per cent.

There is always the counter view that rate hikes take time to deliver and this is why two of the MPC members probably argued against a hike. This could well be the last rate hike in the cycle based on the indications given.

But the retention of the stance indicates that the RBI feels that there is still some liquidity to be mopped up and hence it is not yet time to turn ‘neutral’. Also extending the logic here one can say that this rules out a rate cut in the future too as normally the stance changes first before the repo rate reversal takes place.

Inflation path

With the inflation trajectory for the next year expected to increase from 5 per cent in Q1 to 5.6 per cent in Q4, the RBI’s worries are justified.

Add to this an external shock due to the China factor or an internal one, like a monsoon or crop failure, there could be a another rate hike.

Therefore, the likely implication is there will be a pause going ahead with a possibility of a change later which will be data driven. The RBI, however, has given no overt indication on this and has left it open to the market players to interpret.

The RBI’s growth forecasts appear to be pragmatic and are welcome at a time when several analysts and economists have been talking of rates as low as 5 per cent for FY24.

The IMF, the World Bank and the government have all given numbers above 6 per cent and, hence, the RBI forecast reinforces them. The forecast of Bank of Baroda has been 6-6.5 per cent from the start.

Given that the Indian economy is primarily a domestic demand driven one there is a part decoupling of our growth with that of the Western world. While exports will come down for sure, this will not seriously dent growth prospects and while the economy will move down from the 7 per cent projected for FY23 by the NSO to 6.4 per cent, it would still be reasonably high by global standards.

However, the interesting take is the downward glide path cross quarters from 7.8 per cent to 5.8 per cent. This will be a continuation of the second half of the year performing lower than the first half. It also means that the pent up demand story which played out well in FY23 will not be replicated as the impact of consistently high inflation on consumption will finally tend to dilute slowly the pace.

The inflation forecasts on the other hand will move in a different direction during the year and would increase from 5 per cent in Q1 to 5.6 per cent in Q4. This comes on a base of high inflation in FY23 which normally imparts a modicum of comfort as numbers come in lower.

Notwithstanding this feature, overall inflation would remain above 5 per cent all through the year.

This is assuming there is a good monsoon and kharif crop. Looking ahead, it does look like that we may have to wait longer for the inflation number to come anywhere close to the 4 per cent mark.

Liquidity issue

An issue which has been touched upon by the RBI is liquidity. Presently there is still surplus in the system which affords the stance to be ‘withdrawal of liquidity’.

However, in FY24 there will be repayments of the term repos which were brought in during the pandemic in the form of LTROs and TLTROs, which will cause a decline in liquidity. These would be due in the first quarter of the year when the demand for credit is typically low being the slack season.

We could expect some affirmative steps to be taken by the RBI depending on the evolving situation. This could be through OMOs or term repo auctions.

The credit policy combined with the Budget provides a lot of comfort on the growth prospects for the economy. The concern on inflation remains as it is often caused by extraneous factors that may beyond the control of policy makers.

The Budget quite aptly focuses on growth and the credit policy on inflation, which makes coordination quite seamless.

India in Search of Glory: Looking back & ahead: Financial Express 5th February 2023

 Whenever we look at the progress of any economy, especially in a democracy, the political and social shibboleths cannot be ignored. It is for this reason that it is said that political economy plays a large role in shaping the progress of a country. Therefore, for an economist trying to trace the India story, there is advantage to be had if one has studied the politics of the nation. It is here that Ashok Lahiri, author of India in Search of Glory does very well.

The author started his career as a Reader in Delhi School of Economics and was better known as a Keynesian who spoke English (the course remains extremely mathematical even today) and then moved on to different positions in the ADB and IMF, inhaling global exposure. He also had a stint as chief economic advisor in the corridors of power and fully understood the corporate world while being a director on the board of Bandhan Bank. Now an MLA in the legislature of West Bengal, he is probably best suited to narrate this story. The icing to this experience is that he was also part of the first group of psephologists who made analysing elections an art in India in the Eighties. 

His period of study is post-independence and quite appropriately covers 75 years of independence. He explains that in these 75 years, India has achieved a lot, supplementing each milestone with a plethora of data. However, he argues that there is a long way to go, and we need to resolve the various contradictions that still remain in our DNA.

He divides his narrative into three phases —1947-64, 1964-1991 and post reforms. These were different phases that coincided with economic ideology. Given that to begin with, the economy was run by freedom fighters, the shadow of colonialism was strong and hence the pitch was for self-reliance and socialism. It is not surprising that often the intention was to reverse what prevailed when Britain ruled. As politics evolved, so did ideology, and what we see today is more in the reformist phase where we are more open than ever before.

Interestingly, Lahiri takes us through the evolution of politics as well as economics and weaves the two together. For example, he outlines all the main policies that were brought in by different governments based on their predilections. This would be an almanac for students who do not have to look anywhere when wanting to find out about any economic policy in the past 75 years. He deeply analyses sectarian politics and shows how these undercurrents laid the foundations of economic ideology.

The author rightly says that economics can never be separated from politics and this holds especially true for India, where there are a large number of underprivileged people. People are happier with popular schemes and vote politicians to power. Surprisingly, low levels of health or education are not vote winners as a single popular policy can be. While this can be debated, we must accept it. In democracies policies lead to victories in elections and hence if people prefer immediate consumption to future growth, governments never go the other way. This is what he calls political calculus in operation.

Similarly, he highlights the fact that corruption, which was the bedrock of our system for decades, has now been diluted but not eliminated. He rightly points out that if at the time of voting we have to choose between two rascals, we will end up voting for one of them. This is why we do see a large number of people with criminal records in every party as they are the ones who garner votes. Hence there is still a rocky path ahead of us. Here he does espouse that we need to name and shame the corrupt. But this will be difficult as almost every party hosts this fraternity and would never let this happen.

Further, he argues that our story has been constrained by social cleavage and conflicts often erupting as religious or caste riots. This he believes will increase in the short run, but even out in the longer term as urbanisation and education catch on. This is why we need to focus a lot on better education, which create jobs, that, in turn, make such distinctions irrelevant.

He has quite painstakingly enumerated the entire set of policies brought in by various governments and hence this book can be considered to be an omnibus collection. He traces the change of powers and the undercurrents that led to these changes. While the last two decades will be familiar to most readers, it is the post-independence phase till 1991 that can bring in a lot of déjà vu to those who followed those rather tumultuous years. This was the time when issues like war, famine and  oil price shock had deeper implications for the economy and policy making. His knowledge on elections helps in bringing to the fore issues that swung the electorate.

Is there something missing in the book? The author steers clear of controversy and while describing the events and developments does not name and shame people who did wrong. Where wrongdoings are reported it is taken from published sources and hence there is no critical view presented here. The route chosen is more of an academic, where the flaws are generalised but characters not exposed.

Lahiri’s book is quite timely as we celebrate 75 years of independence and one is able to read about not just the achievements but also the gaps that lie in this search for glory. There evidently is a lot to be done on the socio-economic fronts and what is required is strong governance and determined governments. The author, however, says hope springs eternal. 

The next major event – the monetary policy: Free Press Journal: 4th February 2023

 There have been several important economic announcements this week which will culminate with the MPC meeting on 6-8th of this month with the announcement of the credit policy. Normally a credit policy in February holds less interest as it is the last one of the financial year. The April policy is considered to be the more important one as it sets the tone for the coming year. This time the RBI’s call on interest rates will be keenly watched.

Let us go over the major events that have taken place. On the 31st of the month, the Economic Survey was presented. This is the view of the ministry on the state of the economy. The major part is on the past where data is already available, though the Survey details everything that has happened. It is more of a report card of progress made in various segments of the economy.

The interesting part is, however, the take on the future. Here the Survey gave numbers on GDP growth which has been taken at 6- 6.8% with a baseline growth rate of 6.5%. This is significant mainly because most forecasters are looking at a number less than 5.5%. But the government is sure of this range and in a way goes along with the IMF which gave a forecast of 6.1% for the year. Any number above 6% sounds good while something lower raises a red flag.

The takeaway is that while the world will enter a phase of slowdown, India will be decoupled to an extent. The Survey also points out to inflation coming down, though warns of interest rates remaining elevated. There is concern on the external account and currency. One can surmise that a depreciation is what is being looked at.

Next, came the Budget which was the big event of the year where the government presented the numbers. Yes, some tax slabs have been altered to make the individual happy though it may not mean much in absolute terms. There is additional spending on capex which is what everyone wanted. But one should be cautious in interpreting this number of Rs 10 lakh crore.

While the governmentis doing its bit, the main thrust has to come from the private sector which has been lagging in this respect. So when statements are made that the government capex will crowd-in private investment, there can be some discomfort considering that this has not happened in the last six to seven years.

However, the major area of concern was the fiscal deficit and as the government has decided to continue to tread the path of fiscal prudence, the ratio has been reduced to 5.9%of GDP for the year. The fiscal deficit is the total amount of borrowings which comes from the market as well as the small savings fund besides short-term borrowings. As a last resort there is some draw down of cash reserves. The comfort provided here is that the borrowing programme in net terms will be at Rs 11.8 lakh crore which is almost the same as that last year. This means that there will be less pressure on the system liquidity. This will be the point from where the RBI has to take the baton and react.

The same night of the Budget the Federal Reserve announced a hike of 25 bps this time taking the rate to a range of 4.5-4.75%. The commentary however suggests that there will no rate cut for sure this year and hence while the rate cuts may slowdown and stop as inflation has been trending downwards there is no chance of a reduction. This is something that the RBI will be listening to closely.

Add to this the Bank of England on Thursday increased their rate by 50 bps to 4% though has indicated that it has ended the automatic raising of rates. The question now is what will the MPC do? Inflation in India has been trending downwards and could average 5.3-5.4% this quarter. This is below 6% but higher than 5%. At times when we look at inflation the headline inflation is less important than the core inflation rate. This is above 6% (non-food non-fuel inflation). This being the case the threat of inflation is low but it may take some time before it goes below 5%.

At the same time if the RBI is looking at real interest rates, it is presently at around 1% which can be acceptable.Therefore it will be a toss for a further hike in rate and a pause. The transmission has already been effective in terms of deposit and lending rates and banks have followed suit.

If one goes by the signal given by the Economic Survey and combines the same with the Budget indicative borrowing programme, it does appear that there is a strong case for RBI to hike rates one more time. After that there could be a long pause. This has been the signal given by other central banks too that when they stop raising rates they should take a breather to see how inflation plays out. Today the biggest risks to inflation is China. As China has opened it economy there will be a tendency for demand for goods to go up which will push up commodity prices. Crude oil has once again tended to be volatile.

The RBI policy announcement on 8th February will hence be watched by all the markets closely as they take cues from not just the stance but also language. RBI forecast of growth for next year will also be expected, though normally is provided in the April policy for sure.

Some media interactions on economic survey and budget

 Pre budget on WION

https://www.youtube.com/watch?v=bURFMwl4_u8

On Economic Survey:

https://www.youtube.com/watch?v=XHlatjed1sw

The nudges in various directions should help: Business Line 2nd February 2023

 The Sensex went down, bond yields moderated and the rupee strengthened a wee bit after the Budget announcements were absorbed by the markets. These movements may not be fully reflective of the reactions to the Budget because the stock market was buffeted by the Adani story for the last few trading sessions. The rupee movement may not be directly affected by the Budget content. But the softening of bond yields is a thumbs up for the fiscal path outlined by the Finance Minister.

The macro effects of the Budget are multi-faceted. First, there is an element of growth orientation given the higher capex of the government at ₹10-lakh crore. As this would be directed mainly at roads and railways, where there are strong backward linkages with industries such as steel, cement, machinery, electrical goods etc., the push given is commendable. This push however on its own cannot accelerate the economic growth process, for which private investment needs to step in.

Second, there are sops given on the income tax front provided one switches to the new tax regime. A lot will depend on whether taxpayers opt for this route. If there is a significant migration to the new regime as there are tax savings to be had, there could be a positive effect on consumption at the margin. Given inflation has eroded consuming power, this can be a palliative.

Third, savings is something which can receive a marginal thrust. The new schemes announced for women can work provided the interest rate being provided at 7.5 per cent is better than that on bank deposits. Presently, several banks are offering higher rates which will make this scheme unattractive. Further, the sop to retired folks to invest more in the senior citizen savings schemes will definitely provide higher return but may not involve an increase in gross savings at the economy level as this class may only reallocate their savings portfolio in its favour.

Fourth, investment will get a direct boost from the capex of the government. States need to follow up with their action. This is so because with overall investments in the country going by the gross fixed capital formation rate being around ₹90-lakh crore, until the private sector comes in, there would be some heavy lifting to be done by governments.

Fifth, the SMEs would benefit from the credit guarantee scheme announced. The outlay of ₹9,000 crore is supposed to generate credit of ₹2-lakh crore. Intuitively it can be seen that such schemes are the right way to go because the outlay is a contingent liability which kicks in only when there is a default. As SMEs get loans at 1 per cent lower interest rate, their savings would be ₹2,000 crore on such payments. This class remains vulnerable post Covid.

Inflation may not be affected

Sixth, inflation would be largely unaffected by the Budget as the indirect taxes which come under the purview of GST primarily have not been affected. The government could have lowered the excise duty on fuel. However, the Budget has kept the total realisation of ₹3.4-lakh crore slightly higher than that of FY23, which means there are no plans to lower these duties during the year as of now.

Seventh, though there is not any direct sop for the stock market in terms of capital gains tax or any benefit for corporates, the disinvestment programme will sound good.

Eight, a concern is debt servicing. The interest payments for FY24 will cross the ₹10-lakh crore mark this year. Overall debt of the government is to increase from ₹152.6-lakh crore to ₹169.5-lakh crore in FY24. The Budget hence does provide nudges in various directions. The private sector should start firing.